Indian IT's big four: Will the next decade be as good as the previous one?

The coming decade will be more challenging; only those that foresee change and adapt quickly will remain this strong

Last week TCS reached a historical landmark when its market cap hit the $100 billion mark. India's top four IT service companies viz., TCS, Infosys, WIPRO and HCL Technologies collectively built a revenue base of around $45 billion and created a market cap of around $183 billion (over Rs 12 trillion), which is significantly more than the overall BSE market cap at the start of this century! The combined annual wage bill of these four giants now stands at around $24 billion (Rs 1.60 trillion).  

The last ten year period for these four giants has been phenomenal – collectively they rewarded the shareholders to the tune of Rs 1.74 trillion (without considering HCL Tech’s dividend to be announced for FY2018) in terms of dividends paid and money returned to the stakeholders through buyback of shares. In the last 10 years alone, these four companies have created an incremental market cap of over Rs 10.30 trillion. 

TCS has been at the forefront in creating the biggest market cap as its profit growth in the last ten years has been very impressive.  Its net profit has grown nearly five fold in the last ten years (FY2009 considered as the base year). While Infosys' net profit has grown 2.7 times, the same for WIPRO has grown only by 2.1 times in this period. In terms of market cap, WIPRO has been pushed behind HCL Tech as the latter has grown its profits by more than six fold in less than 10 years.

These software giants have unique positions in the Indian stock markets – in the last ten years, they returned around 50 per cent of the cumulative net profits they made in the form of dividends and share buybacks to the stakeholders. Infosys leads the pack in rewarding the stakeholders as well as employees – it returned 51 per cent of cumulative profits, while WIPRO follows closely with 49 per cent and TCS with about 47 per cent. Employee benefit costs are also highest for Infosys at about 55 per cent of annual revenues, while TCS follows closely second with 54 per cent and WIPRO at 49 per cent.

Interestingly, Infosys is also creating larger share of wealth for public and institutional stakeholders as the promoters’ holding in the company is less than 13 per cent now. In case of TCS, a predominant share of rewards has gone to Tata Sons, which holds nearly 72 per cent equity stake in the company. In contrast, a major share of wealth creation has occurred to the families and family-owned trusts as far as WIPRO and HCL Tech are concerned as the families and family-owned entities hold 60 per cent and 74 per cent stakes respectively.   

Collectively, the big four in IT have a great contribution to nation building in terms of financing investments by group companies, charities, rewarding public shareholders with high cash payouts and spending nearly half of their revenues on salary bills.

Will the story be the same over the next ten years? These companies collectively grew their revenues in double-digits in 7 out of last ten years but the coming decade could be different. It is estimated that these companies grew by just around 3 per cent on YoY basis in FY18. There are no signs of visible double-digit growth in the near future and they have been forced to create jobs in the US. Any incremental wealth creation in the next ten years, therefore, would remain subdued as compared to nearly seven fold jump in their combined market cap in the last ten years.

Will the hierarchy of these giants in terms of market cap change dramatically in the next ten years? It is possible. We might see possibilities of land banks being unlocked or their vast infrastructures being used to foray into other services or tech businesses. They may strengthen their bases in the US under pressure, build digital platforms, consolidate with global technology giants in this tough race to keep the growth rate going over the next decade.

Only those companies that can visualize and execute required changes will be able to beat the overall market and stay in benchmark indices till 2028.

G Chokkalingam is founder and managing director at Equinomics Research